Will Filing Bankruptcy Affect My Tax Refund

Will filing bankruptcy affect my tax refund? It’s important to note that you may still be able to receive your expected refund. However, this isn’t something you want to take for granted. When you file for bankruptcy, the trustee overseeing your case will likely consider any available assets, including your tax refund, as a means of paying off your creditors. In some cases, you may lose your tax refund entirely.

Fortunately, there are options available to help you keep some or all of your tax refund if you’re considering bankruptcy. This can include using exemptions or choosing a specific type of bankruptcy filing. However, these options can be complex and require specific knowledge and expertise to navigate.

If you’re worried about how bankruptcy might impact your tax refund, it’s important to speak with a professional and discuss your options. With the right support and guidance, you may be able to protect your refund and move forward with the bankruptcy process with a greater sense of ease and confidence.

So, will filing for bankruptcy affect your tax refund? The answer is not straightforward and depends on the specifics of your case. Let’s explore your options and work together to find a path forward that works for you.

Is It Possible for a Bankruptcy Trustee to Take Your Tax Refund After a Discharge?

Individuals have the option to file for Chapter 7 or Chapter 13 bankruptcy. While the bankruptcy trustee can keep your tax refund in either case, Chapter 7 typically only allows this to occur once, whereas it can happen every year under Chapter 13.

Roughly two-thirds of Americans who file for bankruptcy opt for Chapter 7. In a Chapter 7 bankruptcy, all non-exempt assets are liquidated, although there are exemptions that vary by state. In some cases, bankruptcy filers may lose the first or a portion of their tax refund.

However, any portion of the tax refund that is derived from income earned after filing for bankruptcy is generally safe from seizure by the trustee. For example, if you file for bankruptcy on June 30, 2022, and your income remains the same throughout the year, half of your tax refund may be put towards paying off your debts. In most cases, if you file for bankruptcy before the end of the calendar year, the bankruptcy trustee may end up with nearly all of the tax refund. There may be differences for married couples depending on various factors such as whether they filed taxes jointly or separately, and whether one of them filed for bankruptcy.

How to Keep Your Tax Refund in Bankruptcy

You can keep your bankruptcy tax refund by taking advantage of all exemptions provided by the federal and state governments. These exemptions were created to ensure that people filing for bankruptcy have enough to live on, including housing, a car for work, and financial assets such as Social Security, pension payments, veterans benefits, and retirement savings.

However, bank accounts, stock investments, and a second vehicle or home are not exempt. Nonetheless, you may be able to keep collections, jewelry, and other luxury items. Tax refunds are extra cash and may not be exempt, depending on your state’s exemptions.

You can use exemptions to retain your tax refund in bankruptcy, although it may be more complicated to set up your payment plan correctly if you’ve filed for Chapter 13. You can also take proactive steps prior to filing for bankruptcy.

Use Exemptions

To keep your tax refund in bankruptcy, you can take advantage of exemptions provided by each state. In many states, the ‘wildcard’ exemption is the best way to do this. This exemption can be used to hold any item that is not already exempt, with a dollar limit. The federal wildcard exemption through April 2022 allows a maximum value of $12,575, in addition to any unused exemptions that could be used for exempt items.

For example, if your tax refund is $2,000, you can claim the wildcard exemption along with $675 from the unutilized exemption pool. This applies even if you haven’t used the exemption money or wildcard on your car, house, or other exempt items.

Some states have wildcard exemptions in addition to federal exemptions, while others do not have wildcard exemptions. The availability and value of the wildcard exemption can vary greatly between states. In some situations, you may be required to use your state’s exemptions, while others may let you choose between state or federal exemptions.

Use the Right Language in Chapter 13 Bankruptcy Plan

Chapter 13 is designed for people who have a steady income but cannot file for Chapter 7. It is not based on the liquidation of assets and is instead based upon a repayment plan. The bankruptcy trustee receives monthly payments, leaving you with enough money to pay your expenses. Any money left over goes to your creditors.

Unless you convince the bankruptcy court to the contrary, your tax refund will be considered surplus money. Your creditors and the bankruptcy trustee can object to any portion of your plan and would likely prefer that the money be used to pay what you owe. You may be able to pay more monthly into your payment plan in return for your tax refund, or you may choose to make your monthly payment plan smaller and use your tax refund for the plan – it all depends on your case.

You should talk to your bankruptcy attorney about your goals. If you are facing an emergency such as a car repair or a water heater failure, you may be eligible to keep your tax refund. You would then ask the trustee to modify your plan so that you can keep your tax refund to pay for the emergency.

Adjust Your Tax Withholding

When more money is taken from a taxpayer’s paycheck than they need to pay taxes, they get a refund. Adjust your withholding to ensure that the federal government receives only what you need. This will give you more income to use for your daily living expenses.

While you won’t receive a refund, if there isn’t enough withheld, you will owe the IRS when it comes to tax time.

Spend Your Refund

If you don’t plan on filing for bankruptcy, another option is to use your tax refund wisely. Make sure to prioritize necessary expenses such as a mortgage, rent, food, utilities, and car maintenance.

However, you cannot use your refund to make multiple advance payments, buy luxury items, or repay a loan to a friend or family member or reduce a credit card balance.

The reason luxury purchases are banned is simple: why would you buy something you don’t need if you can’t pay your bills?

Your discharge may be denied by the bankruptcy court for bad faith. It may seem like a good idea to pay back your credit card or loan debts, but the court will consider those “preferential payments,” where you favor one creditor over another. The trustee may take the money back to distribute it more evenly among creditors.